Reports second quarter 2020 results on Monday, July 20, after market closes
Yield forecast: $ 17.4 billion
EPS expectation: $ 2.08
When International Business Machines (NYSE 🙂 reports second quarter earnings later today, its cloud computing activity will be in the spotlight. It is this unit that is at the heart of the company's turnaround plan.
Unlike such major technical competitors in the cloud computing arena as Microsoft (NASDAQ 🙂 and Amazon (NASDAQ :), IBM has made constant efforts to find its place in the highly lucrative segment.
To get this right, it's critical for the Armonk, New York-based company, at a time when its big customers are shunning IBM hardware and storing their data on rival cloud services. IBM is currently the fifth largest public cloud infrastructure provider, according to research firm Gartner, with a market share of less than 2%.
Due to declining sales and the battle in the cloud computing market, the IBM stock lagged behind its competitors during the recent recovery that started after the March meltdown caused by the corona virus.
Shares of this legacy tech giant, which dominated the early decades of the computer world with inventions such as the mainframe and later floppy disk, closed at $ 125.11 Friday, down about 25% from its February high.
There were clear signs that the technology giant was struggling amid the COVID-19 pandemic. The company recorded lower sales in the first quarter, withdrawn annual earnings expectations and took into account a major restructuring expense – all of which underscores the challenges new CEO Arvind Krishna is facing to revive growth.
"In the coming months, we must focus on the stability of the company and ensure we maintain our liquidity and balance sheet," Krishna said during a conference call as reported by Bloomberg. Going forward, he said, the focus will be on hybrid cloud and AI, with quantum computing “on the way”.
Stabilizing Factors
The impact of coronavirus is likely to put greater pressure on profits in the second and third quarters as IBM's large customers purchase large items such as postpone new mainframes and software. Taking that into account in the current valuation of the stock, we think IBM is still a safe bet for investors who have a long-term view of the company's turnaround plan.
To begin with, we don't see a major blow to the recurring revenue stream that mainly consists of financial services, telecom, and the public sector. These economic areas have remained largely immune to the effects of lockdowns and closings and will help IBM weather the downturn.
The continued growth in gross profit margin and strong balance sheet remain stabilizing elements, even in this unprecedented operating environment.
The new IBM management team, following the departure of Ginni Rometty, who stepped down as CEO in April, has brightened the prospects for the company's long-term growth after many years of declining sales.
Her successor, Krishna, led the company's cloud and cognitive software division. Jim Whitehurst, who was the director of Red Hat, the open-source software giant that IBM acquired for approximately $ 34 billion last year, was named president of the company.
It was Rometty who spearheaded the company's acquisition of Red Hat last year, betting on hybrid cloud technology to reverse the ongoing shift in sales. The acquisition adds a relatively high margin software company to IBM's offering. Red Hat sales increased 18% in the first quarter as the shift to remote working, automation and application modernization accelerated.
Bottom Line
Over the past decade as it grew, IBM undeniably disappointed investors. But after the acquisition of Red Hat and with a new management, we see IBM return to a growth path once the pandemic is over.
IBM's healthy balance sheet, manageable debt and a juicy 5.2% dividend yield that pays $ 6.52 annually make the stock attractive to income-oriented investors.
